REFLECT SCIENTIFIC, INC. - Quarter Report: 2014 March (Form 10-Q)

9

NOTE 5 – RELATED PARTY TRANSACTIONS

As of March 31, 2014, two sons of the Company’s president had loaned $80,000 in the form of interest bearing notes to the Company.  The notes issued during 2012, with a principal amount of $40,000, bear interest at the rate of 7.75% per annum with the interest paid monthly.  The notes issued during 2013, with a principal amount of $40,000, bear interest at the rate of 6.00% per annum with the interest paid monthly. All notes are demand notes, with the principal and any unpaid interest payable upon seven days written notice from the note holder.

NOTE 6 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, payables and notes payable.  The carrying amount of cash and cash equivalents and payables approximates fair value because of the short-term nature of these items.  The carrying amount of the notes payable approximates fair value as the individual borrowings bear interest at rates that approximate market interest rates for similar debt instruments.

NOTE 7 – RECENT ACCOUNTING PRONOUNCEMENTS

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity:  In April 2014, the Financial Accounting Standards Board issued guidance that changes the threshold for reporting discontinued operations and adds new disclosures.  The new guidance defines a discontinued operation as a disposal of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.”  For disposals of individually significant components that do not qualify as discontinued operations, an entity must disclose pre-tax earnings of the disposed component.  For public business entities, this guidance is effective prospectively for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years.  Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance.  The Company does not expect the adoption of this guidance to have a material impact on the Company’s financial position or results of operations.

The Company has reviewed all other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its consolidated results of operation, financial position and cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its current or future earnings or operations.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for forward-looking statements made by or on behalf of our Company. Our Company and our representatives may from time to time make written or oral statements that are “forward-looking,” including statements contained in this Annual Report and other filings with the Securities and Exchange Commission and in reports to our Company’s stockholders. Management believes that all statements that express expectations and projections with respect to future matters, as well as from developments beyond our Company’s control including changes in global economic conditions are forward-looking statements within the meaning of the Act. These statements are made on the basis of management’s views and assumptions, as of the time the statements are made, regarding future events and business performance. There can be no assurance, however, that management’s expectations will necessarily come to pass. Factors that may affect forward- looking statements include a wide range of factors that could materially affect future developments and performance, including the following:

·

Changes in Company-wide strategies, which may result in changes in the types or mix of businesses in which our Company is involved or chooses to invest;

·

Changes in U.S., global or regional economic conditions;

·

Changes in U.S. and global financial and equity markets, including significant interest rate fluctuations, which may impede our Company’s access to, or increase the cost of, external financing for our operations and investments;

·

Increased competitive pressures, both domestically and internationally;

·

Legal and regulatory developments, such as regulatory actions affecting environmental activities;

·

The imposition by foreign countries of trade restrictions and changes in international tax laws or currency controls;

·

Adverse weather conditions or natural disasters, such as hurricanes and earthquakes, labor disputes, which may lead to increased costs or disruption of operations.

This list of factors that may affect future performance and the accuracy of forward-looking statements are illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the unaudited Financial Statements and accompanying notes.  Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions.  The Company believes there have been no significant changes during the three month period ended March 31, 2014, to the items disclosed as significant accounting policies in management's Notes to the Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

11

Plan of Operation and Business Growth

Our focus over the coming months will be to increase the sales of our life science consumables and detectors while, at the same time, continuing to work on the commercialization of our liquid nitrogen refrigeration products.  Of those liquid nitrogen refrigeration products, the refrigerated trailer, known as a “reefer”, is receiving highest priority.  We have our first manufactured unit operational and are currently conducting road tests to collect data as to its efficiency and reliability.

We also continue to focus on the expansion of our detector line and developing alliances with contract manufacturers for our ultra-low temperature freezers and reefer units.  Our new detector unit was introduced into the marketplace in late 2013 to very positive reviews, and sales for the first three months of 2014 have been very encouraging.  We believe that its enhanced functionality, coupled with its low cost, will provide us with a competitive edge over products currently being sold in that specialized market.

Our revenues during the reporting period increased nearly 50% during 2014 compared to 2013 revenues.    

Results of Operations

Three Months Ended March 31, 2014 and 2013

Revenues increased during the quarter ended March 31, 2014, to $402,442 from $268,694 for the quarter ended March 31, 2013, an increase of $133,748.  All of the revenues were generated from our specialized laboratory supplies and detector sales, as we work to continue to refine and commercialize the ultra low temperature freezer technologies.  Sales were significantly higher for both our specialized laboratory supplies and our detectors.  The completion and distribution of our catalog, coupled with the implementation of web site ordering capability resulted in the significantly higher sales.  The new detector has been very well received, showing strong sales for the three months ended March 31, 2014.

With increased sales during the reporting period, cost of goods sold increased in the quarter ending March 31, 2014, as compared to March 31, 2013 to $163,783 from $141,691, an increase of $22,092. The gross profit   percentage improved to 59% for the three months ended March 31, 2014, compared to 47% for the three months ended March 31, 2013.  The increase in gross profit percentage relates primarily to the mix of product sales, with much of the revenue increase during the reporting period coming from the products which carry high profit margins.  In addition, we continue to actively work to obtain more favorable pricing from our vendors in order to increase the margins realized on our product lines.  

12

As a result of our continued focus on operating expenses we realized a reduction of operating expenses in the current period.  Operating expenses for the three months ended March 31, 2014 were $181,482, which represents a decrease of $32,201 from the $213,683 in operating expenses recorded for the three month period ended March 31, 2013.  The decrease results primarily from reductions in consulting fees, with increases in salaries, payroll taxes, licensing offset by decreases in travel expenses and research and development costs.  Operating expenses for the remaining reporting periods in 2014 are expected to remain close to the expense levels shown for the period of this report.

The net income for the three month period ended March 31, 2014 was $26,094, a $137,246 improvement from the $111,152 net loss for the three month period ended March 31, 2013.  Management is pleased that their work to increase sales and reduce expense levels has achieved a profit and will continue to look for opportunities to improve gross margins and reduce ongoing operating expenses in order to further enhance profitability.

The net profit for the three months ended March 31, 2014 was $0.00 per share on both a basic and fully diluted basis.  The net loss for the three months ended March 31, 2013 was $0.01 per share.  The outstanding convertible debt were not used in calculating the net (income) loss per share for the three months ended March 31, 2014 and 2013, as the inclusion would be anti-dilutive.

Seasonality and Cyclicality

We do not believe our business is cyclical.

Liquidity and Capital Resources

Our cash resources at March 31, 2014, were $326,813, with accounts receivable of $166,560 and inventory of $294,423. To date we have relied on revenues and sales of equity and debt securities for our cash resources.   Our working capital deficit on March 31, 2014, was $600,656, due primarily to the $650,000 in outstanding debentures and $559,125 in accrued interest on those debentures.  Working capital on December 31, 2013 was a deficit of $636,869.  Management is working to obtain financing to enable it to retire the remaining outstanding debentures and provide the capital needed to commercialize the low temperature freezer and refrigeration technology.  There can be no assurance that funds will be available, or that terms of available funds will be acceptable to the Company.  The inability of the Company to obtain funding at acceptable terms could negatively impact its ability to execute its business plan.

For the three month period ended March 31, 2014, net cash provided from operating activities was $77,895 which compares to $71,443 of net cash used for operating activities for the three month period ended March 31, 2013.  

Off-Balance Sheet Arrangements

We lease office and warehouse space under a non-cancelable operating lease in Utah.  Future minimum lease payments under the operating lease at March 31, 2014 are $34,100 for that facility.  In addition, we have automobile leases with future minimum lease payments of $5,895.

13

Item 3.  Quantitative and Qualitative Disclosure about Market Risk

Not required

Item 4.  Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures.

As of the end of the period covered by this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based upon this evaluation, our Chief Executive Officer and Principal Financial Officer concluded that information required to be disclosed is recorded, processed, summarized and reported within the specified periods, and is accumulated and communicated to management, including our Chief Executive Officer and Principal Financial Officer, to allow for timely decisions regarding required disclosure of material information required to be included in our periodic Securities and Exchange Commission reports.  Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are not effective due to the material weaknesses in the Company’s internal control discussed below. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

(b)

Changes in Internal Control Over Financial Reporting.

During the fourth quarter of 2013, we identified certain impairment indicators that led us to perform procedures to assess the possible impairment of our goodwill.  While we correctly identified these impairment indicators, we did not have adequate procedures and controls in place to ensure that the requisite analysis to determine the amount of impairment could be conducted in a timely, accurate and complete manner.  During the three months ended March 31, 2014 we have been implementing enhanced documentation, review and supervision processes and procedures over impairment-related testing and analysis.  We anticipate that those changes will be fully implemented during the next three months, and that such implementation will provide reasonable assurance that the quality and frequency of impairment testing is being properly monitored, and that those revised and implemented disclosure controls and procedures will be effective to a reasonable assurance level of achieving such objectives.  However, it should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.  

PART II - OTHER INFORMATION

ITEM 1.  Legal Proceedings

None; not applicable.

14

ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

None; not applicable.

Use of Proceeds of Registered Securities

None; not applicable.

Purchases of Equity Securities by Us and Affiliated Purchasers

During the three months ended March 31, 2014, we have not purchased any equity securities nor have any officers or directors of the Company.

ITEM 3.  Defaults Upon Senior Securities

At March 31, 2014, the remaining outstanding convertible debentures in default were $650,000, including penalties.  The debentures bear an 18% interest rate.  The Company accrued an additional $29,250 in interest during the quarter ended March 31, 2014.  The total accrued interest on this remaining debenture was $559,125 as of March 31, 2014.  Assuming the debentures were converted, 1,000,000 shares of restricted common stock would be issued.

ITEM 4.  Mine Safety Disclosure

Not applicable.

ITEM 5.  Other Information.

None

ITEM 6.  Exhibits

(a)

Exhibits.

Additional Exhibits Incorporated by Reference

* Previously filed and incorporated by reference.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

16

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Reflect Scientific, Inc.

(Registrant)

Date:

May 15, 2014

By:  /s/ Kim Boyce

       Kim Boyce, CEO, President and Director

Date:

May15, 2014

By:  /s/ Tom Tait

        Tom Tait, Vice President and Director

Date:

May 15, 2014

By:  /s/ Keith Merrell

        Keith Merrell, CFO, Principal Financial

Officer

17